Assignment 2: Defined Contribution Plan

Reporting Paper

ACC541
September 23, 2013
Thomas Gruber

Reporting Paper
MEMORANDUM

To: Thomas Gruber, CEO
From:
Date: September 23, 2013
RE: Pension Plans

Defined Contribution Plan

A defined contribution plan is a type of retirement plan where the employer contributes a certain amount each period to the plan but does not have any requirements as to the amount that will be paid out at retirement time. The amount that would be paid to the employee is determined only by what the return is on that investment. The risk for these types of retirement plans is on the side of the employee. The employer expense is equal to the amount that is removed from the employee’s paychecks and placed in the retirement account
These plans follow a specific set of criteria to determine how much will be paid out at retirement age. These criteria might include length of time of employment, what the salary of the employee was, the health of the company, and the earnings for the pension fund assets. The risk in this type of benefit plan is on the employers because the company must place enough money in the account to meet the pension benefits that were promised to the employee. Defined benefit plans are typically funded solely by the company. Based on FASB ASC 715-30-05-4, “the amount of benefit paid depends on a number of future events that are incorporated in the plan 's benefit formula, often including how long the employee and any survivors live, how many years of service the employee renders, and the employee 's compensation in the years immediately before retirement or termination” (FASB
FASB ASC 715-60-05 discusses these standards. Other postretirement benefits might pertain to tuition assistance, legal services, housing, or most significant being retiree healthcare benefits and life insurance. “FASC ASC 715 guidelines require that the cost other postretirement benefits be accrued over the working lives of the employees expected to receive them” (Schroeder, Clark, & Cathey, 2011, p. 470). With these types of benefits, there is no cap as to the amount the retired employee might receive. The costs of these types of benefits can be viewed typically in the notes of the financial statements. Other postretirement benefits are not vested benefits similar to the defined benefits plan. Once the employee leaves the company, if the employee did not retire, the employee forfeits the